Why GST is an important indirect tax reform plan

What is GST?
Goods and services tax is India’s most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states. It is a single national uniform tax levied across India on all goods and services.

Why is it required?
The indirect tax system is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain such as excise duty, octroi, central sales tax (CST) and value-added tax (VAT), among others. In GST, all these will be subsumed under a single regime.

How will the system work?
GST, if adopted, can dramatically alter tax administration. Then, the Centre and states will tax goods and services in identical rates. For instance, if 20% is the agreed rate on a certain good, the Centre and states will collect 10% each on the good. The proceeds would be shared on the basis of the devolution formula recommended by the Finance Commission.

When will it be implemented?
It can be rolled out only when Parliament passes the Constitution Amendment Bill, which has been pending in Parliament since March 2011. That requires votes of at least two-thirds of the members in its favour. In addition, at least half of the state Assemblies will have to pass the Bill. Parliament’s Standing Committee on Finance has not yet submitted its report on the Bill. It is unlikely that it will be passed in an election year.

Why is it taking so long to roll out GST?
In addition to the passage of the Bill, it is also imperative to have a robust country-wide IT network and infrastructure to make the implementation seamless. The IT network work is still in progress. The most important issue on which consensus eludes states and the Centre is regarding the states. GST faces political hurdles as it could rob state governments of discretionary fiscal power. States also fear that they will suffer heavy revenue losses.

Why do states believe that they will suffer revenue losses?
There are certain statespecific issues. For example, Maharashtra, earns more than 13,000 crore annually from octroi. Gujarat, on the other hand, earns about 5,000 crore from the CST. Agrarian states such as Punjab and Haryana earn more than 2,000 crore from purchase tax. Each of these states fear that they will lose these revenues once these levies get subsumed under GST.

If there is a loss in revenue, how will states be compensated?
Discussions are on to work out an independent mechanism to compensate states.

How has the Centre compensated the states so far?The government has brought down the level of CST over the last few years from 4% to 2% as a precursor to rolling out GST. The committee of state finance ministers had made claim of 19,000 crore.

The centre had disbursed 6,000 crore two years back and another 9,000 crore has been provided for in this year’s budget. This budget is for 2010-11, but the states have been claiming compensation for 2011-12, 2012-13, and now 2013-14. These are issues that remain unresolved till date.

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